Waiver to 60 Day Rollover Issue + Growth in the Roth
Client had a pre-tax rollover that the rollover custodian incorrectly put into a Roth IRA in 2020. The custodian agrees to move the contribution to a pre-tax T-IRA if the client completes the request for Waiver to 60 day rollover (details below) but how is the growth in that Roth since 2020 treated? Excess contributions subject to penalty for each year they’ve been in the Roth account?
According to the IRS. Retirement plan administrators, and IRA trustees, custodians and issuers (“IRA trustees”) can now accept late rollover contributions from individuals who self-certify they qualify for a waiver of the 60-day rollover requirement (Revenue Procedure 2020-46) if:
- individuals provide them with the Model Letter contained in Rev. Proc. 2020-46 (or a certification that is substantially similar in all material respects), and
- they don’t have actual knowledge contradicting the certification.
Plans and IRA trustees can rely on the self-certification only for the purpose of accepting a rollover that doesn’t meet the 60-day requirement and not as to whether the contribution satisfies other requirements for a valid rollover. Plans and IRA trustees may also provide the Model Letter to their clients seeking to self-certify a late rollover.
One of the items on the self-certification is that an error was committed by the financial institution making the distribution or receiving the contribution, which appears to be the case here.
Permalink Submitted by Alan - IRA critic on Tue, 2025-06-03 17:00
If the Roth custodian will accept the self cert form alleging custodian error (the only valid reason), they should be able to calculate the gain or loss during the time in the Roth IRA in the same manner as a late recharacterization of a conversion and transfer that amount to the intended TIRA. That would be an equitable solution, while allowing all the gain to remain in the Roth would not be.
The RP does not address treatment of investment experience because the late rollover was viewed as typically completed from 60-90 days following the original distribution and only involving the amount of the original distribution, in this case apparently from a qualified plan that issued a 1099R coded G.
However, if the Roth custodian issues a 1099R it would cause massive confusion at the IRS. Amending the 5498 they issued for a Roth rollover contribution to a TIRA rollover contribution for 2020 would be OK.
If they process this, the client must update their Roth IRA basis to ignore the flawed rollover. I assume that the client reported the 2020 rollover as non taxable and that the IRS never noticed the mismatch between the 1099R with 0 in Box 2a and the 5498 that reported a Roth rollover contribution instead of a TIRA rollover contribution.
Permalink Submitted by Daniel Owen on Wed, 2025-06-04 08:22
Thank you Alan..The client reported correctly as a rollover to T-IRA and didn’t record any Roth basis on the form 8606. The custodian made the mistake of putting it in the client’s Roth IRA and are willing to correct by moving the contribution to the T-IRA upon reciept of a copy of the client’s model letter requesting the exemption due to custodian error but there’s confusion on how the investment growth of that contribution since 2020 should be treated. Any thoughts?
Permalink Submitted by Alan - IRA critic on Wed, 2025-06-04 17:17
RP 2020-46 only addresses late rollovers and contains no instruction whatever regarding investment earning on the originally distributed balance during the period of time it was not rolled into the correct account. In most of the cases envisioned the late rollover would not have been in a tax deferred account as it was in this case for 5 years and any gains would have been currently taxable over that period. All 2020-46 does is provide an extension to the usual 60 day deadline for rollovers.
If the Roth custodian agrees that this was entirely their fault, meaning that they likely are responsible for the resulting financial impact, which in this case is to the IRS, they would not need even the RP, they would just calculate the gain and transfer both the gain and the original distribution into a TIRA.